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Corporate Insolvencies to Stabilize at A High Level in 2010

Source: Allianz

Posted on 24 Nov 2009

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The world's leading credit insurer Euler Hermes is forecasting a 33 percent rise in corporate insolvencies worldwide in 2009. In 2008, half the global increase in insolvencies resulted from financial restrictions whereas in 2009 the main factor has been the economic recession.

The two major factors underpinning corporate insolvencies are businesses' economic situations and profitability and their financing. It generally requires GDP growth of between 2 percent and 3 percent to halt the rise in insolvencies.

"Since mid-2008 the difficulties arising from traditional factors linked to the economic cycle (decline in business outlets) have been severely exacerbated by exceptional factors linked directly to the crisis (such as financing difficulties)", notes Karine Berger, Head of Economic Research at Euler Hermes. "The economic downturn in 2008 accounted for only half the 26 percent rise in corporate insolvencies worldwide. The other half was probably linked to the financial restrictions faced by companies in the second half of the year. For 2009, we estimate that our global corporate insolvencies index, which summarizes the trend in business failures worldwide, will rise by 33 percent. This increase can be wholly attributed to the slump in economic growth". 2009: Global Insolvency Index rises further

The economic and financial crisis had already resulted in a sudden and dramatic increase in corporate insolvencies in 2008 (revised data shows 26 percent rise). The global recession, which intensified and spread to the majority of countries and sectors in the first few months of 2009, has been the most severe since World War II. It has been accompanied by an unprecedentedly rapid deterioration in companies' financial situations with the attendant payment difficulties, and accordingly by a leap in corporate insolvencies.

Euler Hermes' Global Insolvencies Index is expected to post a record rise for the second year running, up 33 percent in 2009. Although insolvencies are on the increase in most countries, the index covers contrasting situations from one country to another:

* Insolvencies have rocketed by more than 75 percent in Spain, Ireland, the Netherlands and the Baltic countries;

* Insolvencies have soared by more than 35 percent in the United States and Northern and Eastern Europe;

* They have also increased significantly in Sweden, the United Kingdom, Switzerland and France;

* The acceleration has been limited in Japan and Germany;

* The noteworthy exceptions are Canada (-5 percent) and South Korea (-7 percent).

In terms of corporate insolvencies, 2009 is also set to be the worst in more than a decade for some countries, such as Sweden and Finland (1996), the United Kingdom (1993), the United States and Norway (1992); it is expected to be an all-time record for other countries such as France, Spain, the Netherlands, Belgium; Switzerland, Austria, Finland, Ireland and Portugal. 2010: diverse trends but overall the index is expected to stabilize at a high level

"The economic recovery expected in 2010 will be slow and vulnerable as domestic demand in the large industrialized countries will be weakened by rising unemployment and uncertainties relating to household purchasing power", explains Karine Berger. "Output is not expected to return to its pre-crisis levels until 2011. As the direct result of this weak recovery, business insolvencies will remain at high levels in 2010. Businesses will not manage to bring their profitability back to pre-crisis levels before 2011, as the decline in turnover will continue to require significant adjustments".

For 2010, Euler Hermes is forecasting a further rise in insolvencies in Western Europe (+3 percent, after +43 percent in 2009 and +30 percent in 2008). Business failures are expected to decline, although still remaining at high levels, in the Americas (United States, Canada and Brazil) and in several Asian countries. The global Insolvencies Index is therefore expected to remain at the same, high level as in 2009.